For homeowners the choice is VERY CLEAR; short sales do less damage to credit, allow the homeowner to satisfy a large portion of the debt and in many cases allow for the homeowner (who has fallen behind on payments) to live “rent free” while the sale is negotiated.
The following article on CNNMoney highlights what hopefully is a positive trend in lenders considering short sales not only as a better alternative to foreclosures but reducing the time it takes for a short sale to be approved. As a side note, I take issue with the Equator “software guy” as his system has flaws and is an obstacle versus a helpful tool at the homeowner level (at least right now).
- The Bank Slayer
Don’t foreclose! Do a short sale
NEW YORK (CNNMoney.com) — Short sales are the hottest thing going in the distressed-property market, and the trend is expected to get even hotter in coming weeks, when the government starts handing out cash to encourage lenders to close these deals.
“Banks have ramped up short sale approvals,” said Duane Legate of House Buyer Network, which connects short sellers with buyers. “They’re hiring a lot of the people who once worked in the mortgage-lending industry and moved them over to short sales.”
These transactions, where lenders allow homeowners to sell their houses for less than they owe, accounted for 17% of all residential real estate sales in February, up from nearly 13% in November, according to a monthly real estate market survey by Campbell/Inside Mortgage Finance.
And Bank of America (BAC, Fortune 500), the country’s largest mortgage servicer, has more than doubled the number of short sales it processed in recent months.
Elizabeth Weintraub, a Sacramento, Calif.-area real estate agent who handles many short sales, was amazed at how quickly a recent deal went through. “Bank of America approved it in 24 days,” she said. “That flipped me out.”
This is a huge change from even just six months ago when the short-sale market was stalled and most people would describe the process has real estate hell. Because lenders stand to lose so much on these transactions, they have been reluctant to make short sales happen, often waiting months before getting back to potential buyers.
Beware: You lost your house but still have to pay
In the past, many short sales would never come to fruition and the ones that did averaged over half a year to complete,” said Chris Saitta, CEO of Equator, which produces short sale software.
“Things would just fall into a black hole and not come out again,” added Weintraub.
And even when banks did agree to the sale, the process could be further complicated if the original owner had a second mortgage.
In most cases, the first lender is repaid in full before any money flows to a second-lein holder. And because most distressed borrowers are severely underwater, there’s usually nothing left to send on. As a result, second-lein holders are left holding the bag and have been killing many deals.
But that has been changing. For one thing, banks realize that they make out far better financially with a short sale than a foreclosure. “The lenders lose 50% on a foreclosure and only 30% on a short sale,” said Glenn Kelman, founder of the real estate Web site Redfin. “And short sales offer a way to get distressed properties off their books quickly.”
And on April 5, lenders and mortgage investors will have even more incentives to offer troubled borrowers short sales instead of foreclosing.
Under the new Home Affordable Foreclosure Alternatives program, borrowers will earn a $3,000 “relocation incentive” and servicers will get $1,500 for handling a short sale.
The investors who actually own the mortgage notes will get $2,000 in exchange for sharing proceeds of the short sales with any second-lien holders. And, finally, those second lien holders will receive up to $6,000 for releasing their claims.
Lenders participating in the program must also determine the market values of properties early on and inform the owners of just what price they’re willing to accept. Then, if owners come back to the lenders with bonafide offers, they have to be accepted within 10 days.
Equator’s Saiita anticipates a short sale explosion in response to the new program. “The challenge will be handling all the volume,” he said.
The company has already tweaked its software, which 58 servicers use, to handle the new HAFA rules. And that should help reduce the time it takes to execute a sale, which currently averages 88 days.
The boom in short sales may accelerate the end to the foreclosure crisis by cleaning out the overhang of borrowers in distress and replacing them with more stable homeowners.
Plus, these sales are better for distressed borrowers because their credit scores suffer less. Going through a foreclosure can knock 200 points off a FICO score, twice as much as the penalty for a short sale.
By Les Christie, staff writer – March 29, 2010: 3:46 AM ET
WASHINGTON — The government launched a new effort on Monday to speed up the time-consuming, often-frustrating process of selling your home if you owe more than it’s worth.
The Obama administration will give $3,000 for moving expenses to homeowners who complete such a sale — known as a short sale — or agree to turn over the deed of the property to the lender. It’s designed for homeowners who are in financial trouble but don’t qualify for the administration’s $75 billion mortgage modification program.
Owners will still lose their homes, but a short sale or deed in lieu of foreclosure doesn’t hurt a borrower’s credit score for as much time as a foreclosure. For lenders, a home usually fetches more money in a short sale than a foreclosure. And the bank avoids expensive legal bills, cleanup fees and maintenance costs that follow a foreclosure.
“It’s very traumatic and embarrassing and frustrating to go through a foreclosure,” said Laurie Maggiano, policy director of the Treasury Department’s homeownership preservation office. With a short sale, she said, “your financial issues are your own problem and not neighborhood conversation.”
Falling home prices and lost jobs have forced many sellers into this position. For example, in Orange County, Calif., short sales made up about 26 percent of the market in March, compared with 17 percent a year earlier, according to data complied by Altera Real Estate, a local brokerage. In the Minneapolis-St. Paul metro area, about 12 percent of all deals since October were short sales, up from about 8 percent a year earlier, according to the Minneapolis Area Association of Realtors.
The expanded incentives will help accelerate short sales, said Mark Zandi, chief economist at Moody’s Analytics. He expects 350,000 homeowners nationwide to use the program through the end of 2012, more than double his earlier forecast.
A short sale appears to be the only way out for Brandee Chambers, 36, of Las Vegas. She got into trouble during the housing boom by taking out a risky loan against her home and using the money to buy two investment properties in Phoenix.
She later lost those two properties to foreclosure, and now she is trying to sell the home she lives in for $209,000, but the mortgage balance is $350,000.
Chambers, who owns two hair salons, says she would rather stay in her home, where she lives with her 14-year old son. But she had no luck getting help with her loan. She said she’s resigned to scaling back her lifestyle and renting out an apartment.
“I’ve had to accept a lot in the last year,” she says.
For buyers, though, short sales can be a great opportunity.
Marco Cappelli, 49, a winemaker from Northern California, is planning to buy a short sale this month in the Sierra Nevada foothills. He and his wife are paying $214,000 for a property that had been listed at $270,000. They pair plan to fix it up, install a hot tub and rent it out to vacationers.
Along with the financial incentives, the new government program makes another key change. Mortgage companies will have to set their minimum bid before the house is listed for sale. If the offer is above that, the lender must accept it.
That’s a big change from current practice. Lenders generally don’t calculate how much money they are willing to accept on a short sale until they have an offer in hand, causing long delays before the sale is approved.
The new program “will give us a degree of efficiency that we have not had in the past,” said Matt Vernon, Bank of America’s executive in charge of short sales and foreclosed properties.
Under the new process, buyers who submit an offer to purchase a home in a short sale should get a response within two weeks, as opposed to months. If that happens as planned, it would be a big improvement. Real estate agents across the country have complained that lenders are often difficult to reach, sometimes only communicating by e-mail and infrequently at that.
“You’re one of 400 properties on a screen,” said Dave Bauer, a real estate agent in Danville, Calif.
Some real estate agents who specialize in short sales are optimistic. “It could be the first government program that actually helps Las Vegas,” said Steve Hawks, a real estate agent there who specializes in short sales. Most borrowers in Las Vegas, he said, owe so much more on their mortgages than their properties are worth they can’t qualify for a loan modification.
The Treasury Department outlined the plan last November, but doubled the original $1,500 in relocation money after realizing that many homeowners need more cash to move out. That’s because landlords usually want large deposits from people whose credit records have gone sour after missing mortgage payments.
However, there are plenty of restrictions. To qualify, the home needs to be a borrower’s primary residence. Homeowners either have to be behind on their mortgages or on the verge of becoming delinquent.
Currently, the program is not available for mortgages owned or guaranteed by mortgage finance companies Fannie Mae and Freddie Mac, though the two government-controlled companies will soon follow suit, said the Treasury’s Maggiano.
Terrific work! This is the type of information that should be shared around the web. Shame on the search engines for not positioning this post higher!